Rationale for the Budgetary Strategy
20.
The underlying rationale of the budgetary strategy was succinctly expressed in the 1991/92 budget speech by
by the Financial Secretary; 'Fundamental to our budgetary strategy is the principle that the public sector must not be allowed to absorb too great a share of Hong Kong's economic resources. If it did, then the private sector would be less able to generate the wealth on which our well-being depends'
21. For practical purposes this rationale translates into maintaining public sector expenditure at between 15 and 20 per
cent of GDP. There does not appear to be an explicit
justification for this target expenditure range other than past
experience of a relatively small public sector and rapid economic growth. In theory economic arguments could be put forward to
support minimising public expenditure, taxation and financing
although empirical verification would be difficult if not impossible1.
1 a) On efficiency grounds, private sector provision of goods and services with the discipline of competition
in a contestable market may be preferable to public sector provision. This suggests minimising the level of public expenditure to GDP insofar as is possible.
b) Taxation levied upon income and expenditure for public finance distorts relative prices in the economy and leads individuals faced with these distorted prices to make inefficient production and/or consumption decisions. In general only lump sum taxes have non-distortionary effects on relative prices. As lump sum taxes are an impractical main source of public revenue the distortions associated with direct and indirect taxation lead to losses of economic efficiency. Consequently lower tax rates can be associated with a more efficient allocation of resources.
c) Government financing requiremnts can either be monetised which builds inflationary pressure or financed by borrowing. Although there is an unresolved debate amongst economists upon the effects of borrowing to finance fiscal deficits, extensive public sector borrowing is likely to crowd out the private sector. The net effect of crowding out depends upon the relative efficiency of investment of the marginal public and private sector expenditures and secondly the effect that holding government bonds has upon individuals consumption and savings decisions.